Next Generation Leaders

How do you make sure your family-owned business has the right leader for the times? The answer, apparently, is to develop multiple leaders in-waiting, with different strengths, so the family board has the right arrow in its quiver, precisely when needed.

So says Gautam Mukunda, an assistant professor in the Organizational Behavior Unit at Harvard Business School and the author of Indispensable: When Leaders Really Matter (Harvard Business Review Press, 2012).

Gautam Mukunda of the Organizational Behavior Unit at Harvard Business School Courtesy of Harvard Business School

In today’s world, the business environment can change very quickly. In contrast, cultivating a future leader takes time, and you don’t really know what the world is going to look like five years from now. “There are very few businesses where you can predict with any level of certainty what you will have to deal with five years down the road,” says Mukunda, whose book analyzes how and when individual leaders really can make a difference.

Mukunda says that’s why families should in particular study General Electric (GE) and why it is so good at cultivating leaders. No-one from outside GE is even considered for the top job, which makes the GE analogy with family businesses quite apt. GE spends 20 years tracking everybody within the company who might one day be CEO material, before picking five finalists, with one eventually selected for the job. “So somewhere in GE today is Jeff Immelt’s successor,” says Mukunda. “But what is even more amazing, is that somewhere within GE is the successor to Jeff Immelt’s successor –because they are probably already working at the company.”

Yet, unlike General Electric, which has more than 300,000 employees to pick from, family-owned businesses typically have only a handful of family members from which to choose, or, if the business is several generations old, maybe, if they are lucky, a couple of hundred or so. “And what are the odds that the person who is the best person for the situation also happens to be the descendant of the person who is in charge right now?” asks Mukunda.

So as family-owned enterprises develop leaders, they need to look at their prospects in a variety of different situations, both who is available in-house, and what their skills are, and who needs to be brought in from the outside to compliment the panoply of skills already under the family’s roof.

“If you want to understand what [potential leaders] are really capable of, look at them over long periods of time in multiple contexts,” advises Mukunda. “If you are a family owned business and you know you will one day hand over control of the business to the next generation, those people should spend time in your company. But make sure they spend some time outside your company, too.”

Indeed, the smartest family-run businesses Penta has come across have an ironclad rule that all family members must first work outside the family business, before coming back to the fold to work. Some even demand that each family member must first get at least one major promotion in an outside company before returning to the family business.

That’s because just being an heir apparent will affect the performance of a family member, as well as the performance of everyone around them. It’s a limiting context, says Mukunda. “But if they have work experience outside the family business, it will strip away a lot of the advantages and disadvantages that come along with the family name,” he explains. “And the more variety an heir apparent is exposed to, the more you will be able to discern what he or she is really capable of.” In addition, of course, they will have the opportunity to learn from other well-run companies and later bring the best ideas back to the family business.

Still, Mukunda believes too much emphasis is placed on who will be the best leader when the emphasis should instead be placed on who will be the right leader for a specific circumstance. “The person who would be the best leader in one environment can be catastrophic in another,” he says. “Look at Winston Churchill. He’s a hero for keeping Britain in the fight against Hitler in May 1940 ­– and he deserves to be. But for basically his entire career before that he was hugely wrong on issue after issue, particularly on how Britain should negotiate with Gandhi. He discredited himself so thoroughly that his prescient warnings against Hitler were entirely ignored. Churchill was the right leader to face Hitler, but the wrong one to deal with Gandhi.”

But most of the time, he says, leaders do not have a huge impact on an organization, and often get too much credit for making “brilliant” decisions. “There are specific circumstances when that is not true, but most of the time it is because most people would have made the same decisions in the same circumstances,” Mukunda says.

Thomas Jefferson, for example, is celebrated for orchestrating the Louisiana Purchase, which is considered one of the greatest achievements of his presidency. “But how many people would not have bought half a continent, given the chance?” asks Mukunda. “Of all the people who might have been president at that time, any one of them would have done the exact same thing.”

The upside for family-owned businesses, says Mukunda, is that they have more discretion over how they want to run their company, than do the leaders of publicly traded companies. “They might not have to answer to shareholders in the same way as the leader of a publicly-traded company would, so they have much more ability to do what they want and create a big impact,” he explains. That’s particularly true when it comes to long-term strategic thinking and having the patience to see a long-term move through to its logical conclusion, without getting side-tracked by short term shareholder demands.

But that patient, long-term management view can be a double-edged sword for family businesses. “If you are making that kind of commitment, who you pick to do that managing becomes incredibly important because you are kind of stuck with them,” says Mukunda. “You can’t just find someone else because it is not working out for the quarter. You are in it for the long haul.”

Remember, the graveyard is also littered with family firms who stuck with the wrong sibling or cousin for too long.

About Penta

Written with Barron’s wit and often contrarian perspective, Penta provides the affluent with advice on how to navigate the world of wealth management, how to make savvy acquisitions ranging from vintage watches to second homes, and how to smartly manage family dynamics.

Richard C. Morais, Penta’s editor, was Forbes magazine’s longest serving foreign correspondent, has won multiple Business Journalist Of The Year Awards, and is the author of two novels: The Hundred-Foot Journey and Buddhaland, Brooklyn. Robert Milburn is Penta’s reporter, both online and for the quarterly magazine. He reviews everything from family office regulations to obscure jazz recordings.